FDIC Law, Regulations, Related Acts

4000 - Advisory Opinions

Brokered Deposit Prohibition of Section 29 of the FDI Act Under
FIRREA

FDIC-89-51

December 21, 1989

Jamey Basham, Attorney

This letter responds to your letter of November 30, 1989. In that
letter, you request an interpretation as to whether certain accounts
held by *** which your client *** serves as trustee, fall within the
brokered deposit prohibition of section 29 of the Federal Deposit
Insurance Act, 12 U.S.C. § 1811 et seq., as added by
section 224 of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989.

The accounts in question are held in the name of an indenture
trustee, and they serve as security for certain issues of C.D.-backed
public housing bonds. This opinion is based solely on those facts which
you state in your letter to the FDIC, and we have made no attempt to
verify those facts. Further, this opinion is of an advisory nature
only, and will not bind the FDIC in the event of any later dispute
concerning these accounts.

Since *** is not in receivership or conservatorship of the FDIC or
the Resolution Trust Corporation, the general exception from section
29, contained in 12 C.F.R. § 337.6(f), does not apply in your case.

Your letter makes a request for three separate interpretations. I
have responded to the first two, requesting interpretations of section
29 of the FDI Act. I have not responded to your request for an
interpretation of section 21A(e) of the Federal Home Loan Bank Act, 12
U.S.C. § 1421 et seq. That section applies only to
"depository institutions. . .organized by the [RTC]. . .during
the period such institutions are within the control of the
[RTC]."
Financial Institutions Reform,
Recovery, and Enforcement Act of 1989, Pub. L. No. 101-73, § 501, 103
Stat. 183, 383. Since *** is not within the control of the Resolution
Trust Corporation, this section has no application to it, and there is
no need for the FDIC to interpret it in your case.

First Argument.Your first argument is that section 29
does not apply to your case because your trustee does not meet the
definition of "deposit broker." It appears, however, that this is
not the case, and your trustee is indeed a "deposit broker"
within the meaning of the statute.

Section 29(f)(1)(B) includes, as part of the definition of
"deposit broker," "an agent or trustee who establishes a
deposit account to facilitate a business arrangement with an insured
depository institution to use the proceeds of the account to fund a
prearranged loan." FIRREA of 1989, Pub. L. No. 101-73, § 224, 103
Stat. 183, 274. On the basis of your factual description of the
transaction leading to the creation of the accounts in question, it
appears that your trustee meets this definition and is therefore a
"deposit broker."

Furthermore, neither of the two specific exclusion sections you cite
apply to your trustee.

You directed our attention to section 29(f)(2)(C), which excludes
from the definition of "deposit broker" "a trust department of
an insured depository institution, if the trust in question has not
been established for the primary purpose of placing funds with insured
depository institutions." Id. You argue that the
indenture trustee's other functions under the trust indenture indicate
that placement of funds is not the primary purpose of the trust.

Some of the functions you list are purely ministerial. The trustee's
obligation to distribute interest payments, to serve as bond registrar,
to effectuate transfer of the bonds, and to file proofs of claim in the
event of the bond issuer's default all fall in this category. The other
function you list--the trustee's duty to enforce its rights and the
rights of the bondholders under the terms of the indenture--is not
purely ministerial, but it is certainly a duty which all trustees
share, regardless of the nature of the trust involved. The mere
presence of these duties does very little to exclude the notion that
one of the primary purposes of the trust was placement of the funds.

You also direct our attention to section 29(f)(2)(I) of the FDI Act,
which excludes from the definition of "deposit broker" "a
agent or nominee whose primary purpose is not the placement of funds
with a depository institution." Id. Again, you argue that
the indenture trustee's other functions under the trust indenture
indicate that the trustee's primary purpose is not the placement of
funds. For the same reasons as applied with the section 29(f)(2)(C)
exception, it cannot be said that the trustee's primary purpose was not
the placement of funds with insured depository institutions.

Second Argument.Your second argument is that section
29's prohibition on acceptance of brokered deposits does not apply to
your rollover mechanism. Section 29(a) of the FDI Act prohibits
acceptance of brokered deposits by a troubled financial institution.
Section 29(b) includes in the definition of "acceptance"
"[a]ny renewal of an account in any troubled institution and any
rollover of any amount on deposit in any such account. . . ."
Financial Institutions Reform, Recovery, and Enforcement Act of 1989,
Pub. L. No. 101-73, § 224, 103 Stat. 183, 273. You state that the
C.D.'s automatically renew or roll over on a monthly basis. Since the
C.D.'s renew or roll over on a monthly basis, the next renewal will be
an "acceptance" under section 29.

You state that the monthly renewal aspect of the C.D.'s was included
because of the possibility that certain events, such as default of the
board issuer, could necessitate prepayment of the bonds in advance of
their stated maturity date. You argue that your renewal mechanism is
not an "acceptance" within the statute because it has none of the
usual attributes of a C.D. roll over. You point out that the renewal
occurs automatically and it does not allow for a change in interest
rate. You also state that the trustee has no ability to withdraw the
funds absent the occurrence of certain stated events.

Nevertheless, the certificates renew every month, and the statute
speaks only of renewals, not of such things as withdrawal rights or
interest resets. In light of the legislative history of FIRREA, it is
apparent that its brokered deposit prohibitions should be construed
restrictively. Several statements made by legislators during the debate
on the brokered
deposit provision clearly indicate that
Congress was seriously concerned with the problem of brokered deposit
use by troubled institutions, and that their use was considered to be a
significant abuse of the deposit insurance system. In view of this
fact, it would be inappropriate to create interpretive exceptions to
the statutory prohibition. Therefore, your renewal mechanism must be
viewed as an acceptance under section 29.

Since these certificates fall within the brokered deposit
restrictions, we would direct your attention to the waiver application
provision of section 29(c) as an alternative to discontinuance of the
account. I have enclosed a copy of the interim regulation on brokered
deposits, which our Board of Directors approved on December 5th and
which will be effective upon publication in the Federal Register.
Please see § 337.6(d) for the details of the waiver application
procedure. I also direct your attention to § 337.6(h), which should
provide you with sixty days of "breathing
room.''